New year, new administration…new tax laws? President Biden ran on a campaign that included a detailed plan for revamping current tax laws.
But what will it look like and how quickly will it go into effect? Like anything in national politics, there are a lot of factors to consider—and the truth is that we don’t know yet exactly what will change (or when).
The takeaway? Consult with an experienced estate planning attorney now about how future changes might affect you and your inheritors. It’s better to be proactive than caught by surprise.
The proposed changes
While campaign promises don’t always come to pass, they’re certainly a good indication of what an elected official hopes to do. President Biden has said he would change tax laws, including the changes indicated below.
Estate and gift tax
Currently, the threshold for estate tax is set at $11.5 million, with a tax rate of 40%. Biden has said he’d like to lower the threshold to $3.5 million and raise the tax rate to 45%.
For high-net-worth individuals, this could lead to millions of extra dollars being subject to a tax rate of almost 50%—a situation that many people hope to avoid!
Eliminating basis step-up
When a person inherits an asset, whether stocks or a home, that asset has often gained value since it was initially purchased. For example, if you inherit a house from your parents, it’s likely worth more today than it was when they bought it.
Current tax laws don’t tax you for the gained value of the asset from the time it was initially purchased to when you inherited it. This is known as a step-up in basis. Biden has talked about eliminating the step-up, so that beneficiaries would be taxed on the full amount gained in value, starting from when the asset was initially purchased.
Timeline under a 50-50 Senate
As noted above, campaign promises aren’t always realized in the manner the elected official first hoped they would be. Biden won the presidential election and has a Democratic majority in the House—but the Senate is split 50-50.
Because of the even split, Vice President Kamala Harris can cast a tie-breaking vote, giving the Democrats an extremely narrow majority. But many decisions aren’t made along party lines or by a one-person majority.
The Senate currently has a filibuster, requiring 60 Senators to agree to move a topic from the debate floor to a vote. And the support of more conservative Democrats, like West Virginia Senator Joe Manchin, is essential to any Democratic majority. This means that many of President Biden’s campaign proposals will have to move more slowly or with some compromises—but it doesn’t necessarily mean they’ll be stopped.
Since taking office, Biden has emphasized that his four points of focus are Covid-19, restoring the economy, addressing systemic racism, and combating climate change. It seems likely that these four issues will be what Biden focuses on first.
Therefore, with an uphill battle in the Senate, it’s possible that the tax changes will be waiting in the wings—but that they may not get punched through this year.
The bottom line is that Biden hopes to rewrite tax laws, but that’s not his current priority. While the political landscape is always shifting, it’s possible that current tax rates will stay the same through 2021.
If changes don’t occur until next year and you want to use a trust to lock in current tax rates, we recommend starting the process now.
These are big decisions, and while the proposed changes are significant enough to spur many people into action, like any big decision, you’ll benefit from not being rushed.
Talk with an estate planning attorney about the unique aspects of your financial situation. They’ll be able to help review with you the trusts that best meet your needs—from planning for your child’s college education to spousal trusts to charitable giving.
Act today to set your family up for tomorrow.
To learn more, contact us to schedule a consultation. Our experienced Texas estate planning attorneys can guide you through the process.